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AUDIT SKILLS WORKSHOP:

AUDITING LEASES

“Change is the end result

of all true learning”
Leo Buscaglia – Author, Professor, Motivator

L&D initiates, supports and guides, builds learning experience plans © BDO
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COURSE OUTLINE
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1.

Auditing Considerations (40min)

• Highlight the auditing issues
01
associated with IFRS 16/ PSAK 73 Audit Procedures and
• Explore a range of potential risks,
Documentation (20min)
internal control considerations
and audit procedures that might Illustrate the required audit
apply in different audit scenarios. 02 procedures and documentation

Case Studies: Lease

Requirements (30min) 03
Provide participants with examples
on how to apply the requirements of
the leases standard

 Course-related activities include:

1 case study with 12 polling and 4 case studies
© BDO
 • IFRS 16 Auditing introduction
In this module we will take you through some early considerations associated with the new
IFRS 16 Leases standard and specifically how they relate to our audit clients who are lessees.

• IFRS 16 Audit issues when determining the discount rate

This module highlight the auditing issues associated with IFRS 16 and the need for audit
clients to determine an appropriate discount rate.

• IFRS 16 Audit issues when establishing lease terms, payments and measurement
This module takes you through the auditing issues associated with IFRS 16 and specifically
issues that arise when establishing the lease term, payments and measurements of lease
liabilities and Right of Use (ROU) assets.

Pre-Requisites
• IFRS 16 Audit issues when identifying leases
In this module highlight the auditing issues associated with IFRS 16 and the need for audit
clients to identify leases.

• IFRS 16 Auditing financial statement disclosures

This module takes you through the auditing issues associated with financial statement
disclosures related to IFRS 16.

• IFRS 16 Impact and independence considerations

In this module we will look at the types of audit clients that are likely to be affected by IFRS
16 before considering some of the independence issues associated with auditing these clients.

• IFRS 16 Other consequential effects and considerations

In this module we highlight the auditing issues associated with other consequential effects &
considerations of IFRS 16.

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AUDITING CONSIDERATIONS

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Auditing Introduction

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 Impact to financial reporting leases As a result of the new requirements in IFRS 16,
all those entities that were lessees and had
operating leases can expect to see a significant
increase in both the amount of leased assets and
The changes from IAS leased liabilities recorded in their financial
17 Leases to IFRS 16 are going statements. The distinction between operating
to have a significant impact and finance leases has been eliminated. As such,
on financial reporting lessees assets and liabilities are both likely to increase in
16 2019 the statement of financial position.
IFR S NUAR
Y
1 JA
Previously, lessees recognised leases as 'finance leases' - both as assets or
liabilities. Operating leases were not captured by IAS 17 with the result
being that many lessees had lease liabilities which were 'off balance
sheet' and not included in the financial statements.

The elimination of the IAS 17 distinction between finance and

operating leases means that all leases (with limited optional
exceptions) are recorded by lessees in the statement of financial
position (as both an asset and a liability).

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 Presentation within the statement of profit and loss and other
comprehensive income for lessees
Under IFRS 16, lessees recognise depreciation Operating lease rental
on ROU assets as a separate charge for interest MEANING expenses have been
on lease liabilities eliminated under IFRS 16.

02 04
As depreciation of ROU There may be instances
There is likely to be
Present interest assets reflects the pattern when entities use
WHAT IS more 'front loading'
expense on in which an ROU assets something other than a
THE of expenses under
IMPACT

lease liabilities economic benefits are

IMPACT
IMPACT

straight-line basis which

IMPACT
IFRS 16 as the
IMPACT ON as a component consumed by our audit
could result in higher
financing element
THE of finance costs clients (i.e. over the asset's
(i.e. interest) is depreciation in earlier
STATEMENT on the face of useful life) typically, this
higher at the years of a lease, which
OF PROFIT the statement of often means an ROU asset
beginning of the would also further
profit is depreciated on a
OR LOSS? lease and reduces contribute to 'front-
& loss. straight-line basis over the
over time. loading' of expenses.
lease period.

01 03

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Audit Issues When Determining The Discount Rate

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 Determining the discount rate INTEREST RATE IMPLICIT IN THE LEASE

The interest rate implicit in the lease, represents the rate of

The discount rate used is the Interest rate implicit interest that causes the present value of (a) the lease
in the lease, unless this cannot payments; and (b) the unguaranteed residual value to equal
readily be determined, in which case the sum of (i) the fair value of the underlying asset; and (ii)
WHICH the lessee's incremental any initial direct costs of the lessor.
RATE?
borrowing rate is used instead.
The interest rate implicit in the lease may not be readily
determinable as it depends on availability of historical data,
such as information about the:
•Fair value of the leased assets at the start of the lease
• Unguaranteed residual asset value at lease end date.

INCREMENTAL BORROWING RATE

• The incremental borrowing rate, represents the interest

rate the entity would have to pay to borrow over a
similar term and with similar security, the funds
necessary to obtain an asset of similar value to the ROU
asset in a similar economic environment.
• The incremental borrowing rate is not based on the
entity’s Weighted Average Cost of Capital (WACC)
because the WACC is not generally representative of the
rate an entity would pay on borrowings.

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 Potential risks and internal control considerations
POTENTIAL RISKS
1 Determining the interest rates implicit the
leases
• Unreliable estimates to derive the interest rate implicit in
the lease or to determine incremental borrowing rate
(Accuracy and Valuation risks)

• Using the incremental borrowing rate when the interest

Different types of
2 Identifying similar borrowings and the interest
rates used
rate implicit in the lease is readily determinable
(Accuracy and Valuation risks)

• Applying the same discount rate across all leases, even

potential controls
though the leases do not have similar characteristics or
over the agreement terms (Accuracy risk)
identification and
application of
3 Providing reliable data to perform lease liability
calculations • Entity using WACC as the discount rate, instead of the
required IFRS 16 borrowing rate (Accuracy risk).
discount rates:

Use of specialist to help determine

4 incremental borrowing costs

Applying appropriate discount rates to

5 different leases/assets

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 Use of incremental borrowing rate
Where incremental borrowing rates are used as the discount

Potential procedures rate, obtain evidence that the interest rates implicit in the
leases were not readily determinable (A&V)

Obtain an understanding of Management’s Calculation of incremental borrowing rate

Process Obtain support from management for their calculation of
Obtain an understanding of management’s process for the incremental borrowing rate. Consider similarity of
benchmark borrowing and securing assets, validate market

2
determining the discount rate, including assessing the
source and appropriateness of the supporting
documentation for their accounting estimate. The reliability
of the estimate is largely dependent on the avaialibitliy of
1 3 inputs, examine assumptions made by management and
recalculate (A&V)
Validity of discount rates used
relevant, observable data from external purposes (A)
Engage internal specialists to assist with checking validity of
Automated Tools andTechnique discount rates used (A&V)
Use of ATT to validate the entity’s model (e.g.,
Rainbow) (A) 4 Discount
Rate
5 Use of Accounting Estimates template
Estimation uncertainty of the discount rate
If the discount rate is considered to be a significant
Evaluate the degree of estimation uncertainty of the accounting estimate, consider use of the Accounting
discount rate and, if significant, how management has Estimates template (A&V)
addressed this, such as by considering the effect of

6
alternate assumptions on the estimate. The impact of a
small change in the discount rate can be significant
depending on the length of the lease; therefore we apply
professional scepticism and remain alert to possible
7 8
management bias (A&V)

Determination of interest rate implicit in the

lease
Obtain evidence (supporting and contradictory) for the
interest rate implicit in the lease, and consider how readily
determinable the rate is (Accuracy & Valuation assertions
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Audit Issues When Establishing Lease Terms, Payments And
Measurement

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 Potential risks and internal control considerations

Accuracy of data capture - Including at

inception or changes during the life of Data captured by the entity is incomplete or inaccurate (for
the lease 1 example, lease term information, value of payments)
(Accuracy risk)
Identifying and evaluating lease
extensions, break options, Entity management judgement or application is faulty
relating to the application of lease terms and lease
penalties or incentives
2 payments, resulting in incorrect lease accounting under IFRS
16 (Accuracy risk)

INTERNAL
CONTROL Tracking relevant indices
Considerations 3 Lease modifications not identified or treated correctly
(Accuracy risk)

If a new software or another package is being used to

Identifying lease modifications determine the accounting entries required by IFRS 16, the
(throughout the life of a lease) 4 calculation of those accounting entries may not comply with
the requirements of IFRS 16 (Accuracy risk)

Verifying the accuracy of data output from any

new software or other packages being used to
determine the IFRS 16 accounting entries

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 Test 5: Read minutes to determine if there are any planned changes in the
entity’s business strategy that may impact expected lease terms/options
Potential procedures (Accuracy assertion)

Test 1: Read the lease contract to confirm the terms of Test 6: Assess updated contracts and other correspondence for lease
significant leases and evaluate management’s judgements modifications and appropriate treatment of modification (this may result in
regarding lease payments and lease term a separate lease if additional right to use increases lease scope)
(Accuracy assertion) (Accuracy assertion)
Test 2: Obtain appropriate supporting documentation for
fixed payments from commencement date, variable Test 7: Select significant leases expected to expire or have an
payments, residual value guarantee, exercise price of extension or termination option that is exercisable in the next 1-2

C E

LE NG
purchase options or termination penalties included in

CH
years, for leases identified:

FA AS
TS
determining the lease liability • Obtain an understanding of the business plan for that unit

AS ES
LE

A
(Accuracy assertion) that may directly or indirectly impact the underlying asset
3 TYPES

E
• Make inquiries to respective operational business line leaders
OF to ensure the entity’s plan is consistent with their
Test 3: Obtain appropriate supporting documentation for
initial direct costs, remediation costs, payments made at or AUDIT understanding
prior to commencement date or cash incentives received in PROCEDURES (Accuracy assertion)
determining the ROU asset (Accuracy assertion)

Test 8: Where management has implemented a new process

Test 4: Use audit data analytics tools or data integrity tests
to (1) look for errors in formulae, programming or hard
LOOKING including a system of controls to assist with identification of
leases, payments and measurement of lease liabilities and
coding changes or (2) test balances produced by the entity’s BACK ROU assets, consider testing operating effectiveness of
calculation of lease liabilities or ROU asset values when these controls (Accuracy assertion)
compared to BDO calculations (Accuracy assertion)

Test 9: Consider management’s assessment Test 10: Where there are variable payments Test 11: For inputs subject to
of likelihood of break or extension options that depend on an index, use market data management estimation (e.g.
being exercised and evaluate this against to confirm the relevant index at lease early termination, exercise
evidence of historical business practices in commencement and at subsequent extension, exercise purchase
respect of exercising lease options reporting dates has been applied (Accuracy options), perform a retrospective
(Accuracy assertion) assertion) review (Accuracy assertion)

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Audit Issues When Identifying Leases

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 Potential risks and internal control considerations
Someone at the entity has been tasked with assessing
the impact of the new standard or implementing a
transition plan

Entity management and staff has been trained on the

Service Elementes new requirements
Low Value Leases Competence
Embedded service elements
Entity management lack are not identified for An external provider has been used to educate the
Incorrect application of knowledge or fail to implement potential separation or the finance team or create an IFRS 16 lease register
low value lease exemption the new standard appropriately
(Completeness) lease payment is incorrectly
(could affect multiple assertions – allocated between the lease TCWG demonstrate appropriate governance of
CVEAP) and other service elements management regarding adoption of IFRS 16
Substitution Rights (Accuracy)
Controls have been designed & implemented to
Supplier substitution rights support identification and maintenance of a complete
are not properly identified Short-term Leases
3 4 and accurate lease register
by the audited entity,
resulting in improperly
5 Purchase and/or Controls have been designed & implemented to
exemption options review lease terms for control, substitution rights or
recognised Right of Use
(ROU) assets (Existence) 2 6 overlooked in determining service elements
lease term less than 12 Controls have been designed & implemented to
months under establish a low value accounting policy and monitoring
POTENTIAL
Lease Management 1 RISKS 7 the short-term lease
exemption (Completeness)
of its application.

The entity does not

analyse, track and, whese
appropriate, recognize all Supply Agreementes
leases meeting the
definition in IFRS 16 Consideration is not given to supply aggrementes (i.e. fleet
(Completeness) vehicles, IT agreements, service agreements) which may
contain leases (Completeness)

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 Potential procedures

Completeness Assertion
• Compare list of operating leases with IFRS 16 lease register
(consider prior year operating lease commitment note)
• Assess eligibility for recognition exemptions (consideration
of short-term leases and low value leases)

Completeness and Existence Assertions

• Identify leasing/rental supplier payments from the general ledger, evaluate
the nature of the contracts and, where applicable, agree them to the lease
register
Existence and Accuracy Assertions • For a sample of physical assets, trace into either the Property, Plant and
Equipment (PPE) register or the lease register
Test a sample of entries in the lease register
to source documents to evaluate the
accuracy of the data in the lease register

Completeness, Existence and Accuracy Assertions

For new lease agreements during the year, review lease terms to determine if
they meet the definition of a lease under IFRS 16 (i.e. the lessee’s direct right
of use and whether they obtain substantially all economic benefits of the
asset). Also consider the nature of the asset, whether the entity has sufficient
evidence that no substitution rights exist, and whether any service elements
exist within leases

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Auditing Financial Statement Disclosures

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 Potential risks and internal control considerations
Potential Risks The assessment and
re-assessment of
Determining the appropriate level of disclosure is a banking covenants or
INTERNAL other agreements

01
matter of judgement on the part of entity
CONTROL Completeness and triggered by
management and may be complex for entities with
significant or unusual leases CONSIDERATIONS accuracy of such recognition of leases
disclosures on the statement of
(Presentation risk) financial
position

Recognition of leases on the statement of financial

02
position could cause an unintended breach of banking
covenants or other arrangements resulting in the
need to re-present long-term debts as short-term
(Presentation risk)
Compilation and
review of the lease
Entity management may not identify and capture disclosure

03
data relating to all leases, information
particularly historic leases, and as a result,
the disclosures may be incomplete (Presentation risk)

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 Potential procedures

Further audit work and documentation is likely to be needed to Potential Audit Procedures
support:

Review the disclosure checklist (Presentation

Disclosures relating to assertion)
leases that are subject to
short-term or low value 1
exemptions Test management controls over the generation and
review of disclosures, including mapping to
underlying data and calculations (Presentation
‘New’ leases (which assertion)
2 may include initial
Those leases that have direct costs) Obtain audit evidence to support the disclosures
made by management, including evidence that any
been terminated in the exemptions taken are consistently applied to
applicable leases (Presentation assertion)
period (and which may
include restoration or 3
other termination costs) Obtain entity’s analysis of bank covenants and
review applicable leases to ensure that the
(Presentation assertion) disclosure is appropriate (Presentation assertion)

In addition, as significant judgement is often required when an entity Verify the entity’s determination of the carrying
discloses information about the nature of their leasing activities, potential value of ROU asset additions and matching lease
restrictions or covenants imposed by leases, and sales and leaseback liabilities and obtain supporting documentation from
transactions, we verify that these disclosures are complete and accurate management to support these disclosures
too (Presentation assertion). (Presentation assertion)

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 Illustration: Disclosure requirements

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 Illustration: Disclosure requirements

(PSAK) 73:47(b) requires that lease

liabilities be presented separately from
other liabilities or grouped with other
liabilities, with appropriate disclosure of
which line item the lease liabilities
are included within

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 IAS 7:17(e)financing activities the separate disclosure of cash flows
arising from financing activities is important because it is useful in

Illustration: Disclosure requirements predicting claims on future cash flows by providers of capital to the
entity. Examples of cash flows arising from financing activities are:
(a) Cash proceeds from issuing shares or other equity instruments;
(b) Cash payments to owners to acquire or redeem the entity’s
shares;
(c) Cash proceeds from issuing debentures, loans, notes, bonds,
mortgages and other short-term or long‑term borrowings;
(d) Cash repayments of amounts borrowed; and
(e) Cash payments by a lessee for the reduction of the outstanding
liability relating to a lease.

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 Illustration: Disclosure requirements
IAS 1 (PSAK 1):117(b) Disclose accounting policies that
are relevant to understanding of the financial statements
(i.e. those for material items).

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 Illustration: Disclosure requirements

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 Illustration: Disclosure requirements

(PSAK 1):125 Disclose significant key

assumptions concerning the future, and
other key sources of estimation
uncertainty. and IAS 1 (PSAK 1):122 Disclose
significant judgements management has
made in applying the entity's
accounting policies.

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 Illustration: Disclosure requirements
PSAK 73:PP48 for the purposes of PSAK 73:59
Only disclose information that is expected to be relevant to users of financial
statements. This is likely to be the case if it helps those users to understand:
iii. Sensitivity of reported information to key variables. Reported information
may be sensitive to, for example, future variable lease payments
iv. Exposure to other risks arising from leases

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 Illustration: Disclosure
requirements

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 IFRS 16 (PSAK 73):54
Provide the disclosures specified in paragraph
53 in a tabular format, unless another format is
Illustration: Disclosure requirements more appropriate. The amounts disclosed shall
include costs that a lessee has included in the
carrying amount of another asset during the
PSAK 73:53 reporting period

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 IFRS 16 (PSAK 73):54
Provide the disclosures specified in paragraph
53 in a tabular format, unless another format is
Illustration: Disclosure requirements more appropriate. The amounts disclosed shall
include costs that a lessee has included in the
carrying amount of another asset during the
PSAK 73:53 reporting period

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 Illustration: Disclosure requirements

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 Illustration: Disclosure requirements

IFRS 16 (PSAK 73): 55

Disclose the amount of its lease commitments for short-term leases
accounted for applying paragraph 6 if the portfolio of short-term
leases to which it is committed at the end of the reporting period
is dissimilar to the portfolio of short-term leases to which the
short-term lease expense disclosed applying paragraph 53(c)
relates.
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Impact and independence considerations

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 Nature & extent of impact
TRANSPORT TELECOMS
• Leased assets may range from high value • As heavy users of ‘network assets’
(aircraft, ships, trains) to entities using (including fibre optic cables) this may lead
multiple assets – such as transport trucks to judgemental questions about whether
• Renewal options are not uncommon in this leases provide control or provide capacity to
sector but there may be additional the entity
judgement required to decide when there • Management exercises judgement to
is an economic incentive to renew an
existing lease or acquire a new asset
NOT separate lease and non-lease telecoms
‘bundles’ provided to customers of the
(including initial considerations about
costs of taking on a new lease).
LIMITED entity.

TO
RETAIL REAL ESTATE
• Leases are usually in place for stores and • In many instances, real estate entities may
warehouse operations which represent a be the lessor and so may be more affected
major part of their business activities & by the activities of their lessee customer
costs base
• There may be substantial judgement • This could lead to issues in terms of
attached to whether entities intend to customer demand for shorter lease terms,
renew a particular lease Research conducted by the International Accounting resulting in greater lease turnover and
• Some lease payments may include other pressure on pricing
Standards Board (IASB) on 30,000 listed entities
service charges which need to be • Increased level of customer volatility (or
highlighted that across the regions of the world
separated. between 23% to 62% of listed entities currently demands for variations in lease terms) could
disclose off balance sheet leases. As such, these put pressure on entity financing.
entities and are likely to be affected by the
introduction of IFRS 16 as these leased assets are now
required to be recorded in the statement of financial
position.
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 Accounting advisory services that BDO may be
Independence matters able to perform for audit clients include:

Provide general observations Provide copies of historical

Identify potential changes
and recommendations on lease agreements that
in generic policy and
overall project plan and were provided by the
financial statement
timeline entity and retained in our
presentation
audit files

Explain our views on how Identify accounting policy

Provide generic examples
the standard applies to a gaps and provide general
of available financial
transaction and review of feedback on management’s
statement presentation and
management’s preliminary accounting policies
disclosure
conclusions

Assess and provide general

Assess internal controls after Assist with the training of observations on the impact
such controls have been entity personnel, including of the new standard on non-
designed and / or providing BDO thought accounting aspects of entity
implemented leadership operations

When providing accounting and advisory services to an audit client, a

self-review, self-interest and familiarity threat is created if we have
assumed a management responsibility.
Since we are prohibited from assuming a management responsibility,
there are no actions available to reduce the threat to an acceptable
level. We would no longer be independent of our audit client.
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Other Consequential Effects And Considerations

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 Other consequential effects and considerations Potential Audit Procedures
Potential Risks
1. If contracts contain If payments made are based • If applicable, verify the impact of IFRS 16 on
amounts payable which are on management accounts employee remuneration and bonus schemes,
based on amounts which will (rather than audited share-based payments, earn outs or amounts
be affected by the adoption financial statements receivable in respect of business disposals
If a significant over payment
of IFRS 16, an entity might prepared in accordance with
arises (for example) for a
make significant under or IFRS), those management
past business combination,
over payments unless accounts may not include
this could result in a charge
appropriate changes have adjustments required by
for impairment being
been made to those IFRS 16, resulting in
required (Valuation risk).
contracts, or they are payments being made which
specifically based on are not in accordance with
previous accounting the contractual
standards (Accuracy risk) requirements (Accuracy risk)
•Review payments to identify:
• (1) Under or over payments made in the
period when amounts payable have been
Internal Control affected by the adoption of IFRS 16 and
• (2) Over payments for assets that could
result in an impairment
(Accuracy and Valuation assertions)
01 Identification or 03
determination of
Management’s processes potential under or over Identification or
over the assessment and payments reconciliation of potential
re-assessment of other differences or adjustments
arrangements with between management
amounts being dependent accounts and IFRS-
on reported profit 02 prepared financial
measures statements
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Practical Issues and Recommendations (“Refresher”)

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 Practical issues and recommendations
DETERMINATION OF THE IBR RATE

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 Practical issues and recommendations
DETERMINATION OF THE IBR RATE

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 Practical issues and recommendations
DISCOUNT RECOGNITION WITH PSAK 73 ADENDUM

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 Practical issues and recommendations
DETERMINATION OF THE NON-CANCELABLE PERIOD
FOR EACH LEASE CONTRACT

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 Practical issues and recommendations Asersi FS mensyaratkan
kelengkapan, sehingga biasanya
kami membuat dokumentasi
DETERMINATION OF THE POPULATION OF LEASE CONTRACTS mengapa daftar populasi
tersebut sudah lengkap, Contoh
1 perusahaan mempunyai
sistem sentralisasi dalam
pembuatan kontrak jadi ketika
mengambil daa dari sentra
pembuatan kontrak dapat
meyakinkan kelengkapan asersi
Untuk yang desentralisasi, kami
biasanya menambah prosedur
scan GL di beban-beban yang
menurut manajemen
kemungkinan post sebagai
biaya-biaya sewa.

44
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 Practical issues and recommendations
SEPARATION OF LEASED COMPONENTS AND NON-LEASED COMPONENTS

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AUDIT PROCEDURES AND DOCUMENTATION

© BDO
 WORKING PAPER DEMO: Lease liabilities (APTNG Library Procedures)
H8. LEASE LIABILITIES

Open
YOUR file

ACTUAL CLIENT
WORKING
PAPER

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 WORKING PAPER DEMO: Right of use assets (APTNG Library Procedures)
A8. RIGHT OF USE ASSETS

Open
YOUR file

ACTUAL CLIENT
WORKING
PAPER

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 WORKING PAPER DEMO:

(1) IFRS 16 Leases Risk

Identification Checklist [APT
NG]

(2) IFRS 16 Leases Testing

Workbook [APT NG]

© BDO
WORKING PAPER DEMO: IFRS 16 lease disclosures
APTNG Library Procedure
SPEAKER NOTE: For the WP
DEMO, the Speaker can use an
actual client data from a
completed audit engagement
(this approach is highly
recommended).

Open YOUR
file ACTUAL CLIENT
WORKING
PAPER

50
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IFRS 16 Leases Risk Identification Checklist [APT NG]

© BDO
 Illustration: IFRS 16 Leases Risk Identification Checklist
INSTRUCTIONS

52
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 When a risk is
identified,
engagement teams
Illustration: IFRS 16 Leases Risk Identification Checklist should consider
RISK IDENTIFICATION - LEASE 1 whether the risk is
also a fraud risk,
After each question is answered,
including potential
Answer the questions in this if the response is 'Yes', potential for management
risks of material misstatement
checklist in order as subsequent
will be revealed.
override.
questions will be affected by
responses to previous questions.

Based on the guidance

provided regarding the
potential RMM, conclude in
column E if an RMM exists
and, if 'yes', add a
customised risk in APT.
Document and/or
reference how the risks
identified in the checklist
are addressed in the audit
file.

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IFRS 16 Leases Testing Workbook [APTNG]

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 Illustration: IFRS 16 Leases Testing Workbook Instructions - Follow the questions outlined
in this work paper in order. Use the drop
down menus in the blue input tabs to
STEP 1. SCOPING Purpose - This guide illustrates respond to each of the questions. After
considerations and guidance for the filling out the initial information outlined
application of the new leasing by the questions in Step 1.Scoping tab, if
standard - IFRS 16 Leases from the applicable, move to the Step 2 tab and
lessees' perspective. begin filling out the questions there, also
using the available drop down menus. After
each question is answered, instructions will
direct you to the next applicable step.

Ensure to put working

paper reference (e.g
YES BDOIn_UTE_Memo on
Review of MoM and
Significant Contracts and
After each question is answered,
Agreements]
if the response is 'Yes', potential
risks of material misstatement
will be revealed.

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 Auditor to provide the
relevant information here
Illustration: IFRS 16 Leases Testing Workbook and appropriate WP Ref.
STEP 2. BASIC INFO

This column should be properly

responded – as it will trigger the
lease testing information in Step 3.
Lease Payments and Amortisation
and Interest

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 Illustration: IFRS 16 Leases Testing Workbook
STEP 3. LEASE PAYMENTS

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 Illustration: IFRS 16 Leases Testing Workbook
AMORTISATION AND INTEREST
This information here are generated based on the
responses in Step 2. Basic Info

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CASE STUDIES: LEASE REQUIREMENTS

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Case Study #1

© BDO
 Determining the lessees’ incremental borrowing rate
‘The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar
security, the funds necessary to obtain an asset of a similar value
to the right-of-use asset in a similar economic environment.’
H AT IS THE IFRS 16, Appendix A
W
R EM E NTAL
INC
WING A common approach for determining the incremental borrowing rate for a lease is to determine a ‘base
BORRO ? rate’ (or ‘reference rate’) based on readily observable interest
RATE
rates for public or liquid corporate debt and adjust that rate for other relevant factors such as
financing and asset factors

HOW I
S THE
INCRE
BORRO MENTAL
WIN
DETER G RATE
MINED
?

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 How is the incremental borrowing rate determined?
Credit Risks
• Consider the credit risk of
the borrower
• Characteristics of the
agreement between lessee
and lessor will affect • A lease is essentially a
adjustment required for borrowing secured by the
credit risk underlying ROU asset
• Credit quality of legal FINANCING ASSET
• Many base rates will be
based on unsecured loans
entity entering into lease
should be used to estimate FACTORS FACTORS
(e.g. government bonds)
• Need to adjust the base
effect of credit risk on IBR
rate to extent of security
E.g. unsecured base rate
may reduce if the loan
(i.e. lease) is secured
Liquidity Risk
If base rates are based on liquid
debt (e.g. government bonds),
then a liquidity premium may
need to be considered with a
corresponding increase in the IBR

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 #3
POLLING QUESTIONS: IBR Rate Is the IBR the interest rate that an entity
pays on its other debts?

#1 Yes No
Can a lessee choose between using the
interest rate implicit in the lease and their
IBR? The IBR is not the interest rate that an entity pays
on other debts (e.g. bank loans, revolving credit
Yes No facilities, etc.).
These rates may be an input into measuring the
IBR for a lease, or may be appropriate solely on
A lessee can only use their IBR if the basis of materiality; however, they would not
the interest rate implicit in the typically have a similar term, security and other
lease is not readily determinable economic characteristics as the underlying lease.

This is because the level at which IFRS 16 applies to

#2 leases (i.e. the unit of account) is the individual
Can an entity use the same IBR for all of its lease, therefore, a discount rate is not determined
leases? for an entity as a whole, but for each individual
lease. Also, different leases have different lease
Yes No terms, different underlying assets as security, etc.

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 Are there any practical expedients that can
be used to simplify the determination of a
POLLING QUESTION: Leases portfolio lessee's IBR?

Yes No
Before an entity attempts to determine its
IBR for a contract or a portfolio of lease
#5
contracts, entities (and engagement teams)
must first satisfy themselves that the Would the following portfolio of leases be considered
portfolios that have been established satisfy to have similar characteristics in accordance with the
the criteria in IFRS 16.B1.
practical expedient in IFRS 16.B1?
#4
Portfolio Description

Portfolio A appears to be consistent with the Portfolio A Consists of real estate leases in Country Z with lease
requirements of IFRS 16 since it considers terms of between 3-5 years
similar underlying assets and terms.

IFRS 16.B1 allows an entity to apply IFRS 16 Yes No

to portfolios of leases with similar
characteristics if the entity reasonably
expects that the effects on the financial
statements of applying this portfolio
approach would not differ materially from
applying IFRS 16 to the individual leases
within that portfolio.

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 Would the following portfolio of leases be considered to have
POLLING QUESTION: Leases similar characteristics in accordance with the practical
expedient in IFRS 16.B1?
portfolio
Portfolio Description

Portfolio B Consists of real estate leases in Country X with lease

Portfolio B appears to be
terms of between 7-10 years
consistent with the
requirements of IFRS 16 since
it considers similar underlying
assets and terms. Yes No
#6
Portfolio C is inappropriate because the lease term
range is extremely broad (2-25 years), therefore,
Would the following portfolio of leases be
the portfolio does not consider ‘similar term’.
considered to have similar characteristics in
accordance with the practical expedient in IFRS
The portfolio has lease payments that are highly
16.B1? material, meaning it is unlikely that they would
Yes No comply with the requirements of IFRS 16 by
#7 virtue of materiality.

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 POLLING QUESTION: Leases portfolio

#8
Would the following portfolio of leases be considered to have similar characteristics
in accordance with the practical expedient in IFRS 16.B1?

The portfolio above has lease payments that are highly

material, meaning it is unlikely that they would comply
with the requirements of IFRS 16 by virtue of YES NO
materiality. Portfolio D does not consider a similar
economic environment as leases in 5 different
jurisdictions have been grouped together and the lease
term range is also very broad (10-40 years).

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 POLLING QUESTION: Leases portfolio
Would the following portfolio of leases be considered to have similar characteristics in
accordance with the practical expedient in IFRS 16.B1?
#9

Portfolio E does not consider the fact that the leases

The portfolio above has
lease payments that are
were entered into by the subsidiaries in the group
structure in different geographic locations (i.e. the IBR is
YES
highly material, meaning it
not ‘the rate of interest that a lessee would have to
is unlikely that they would
pay’). The use of an IBR which reflects the interest rate
comply with the
that the corporate parent would pay would generally not
requirements of IFRS 16 by
virtue of materiality.
be appropriate, although it is necessary to consider the NO
overall structuring of the arrangements.

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 RE
TH AD
IS!
POLLING QUESTION: IBR Rate Lessee A enters into a 15 year lease for a property
Lessee A is required to make lease payments on a
#10 monthly basis
Should Lessee A use the 15 year The weighted average life of the lease is 11 years
bullet loan rate as its IBR because: Lessee A cannot readily observe a borrowing rate for a
• It is readily observable, and similar amortising loan (i.e. repayment of principal and
interest on a monthly basis)
• The 15 years borrowing term matches the
15 year payment term of the lease? Lessee A can observe borrowing rates for bullet loans
(e.g. a single balloon payment at the end of the loan, or
payment of interest on a monthly basis with a balloon
repayment of principal due only at the end of the loan)
YES NO with:
• A 10 year maturity
• A 15 year maturity
In this case Lessee A would need to apply judgement when determining the IBR.
Lessee A may determine that it is more appropriate to use the 10 year bullet rate
as a starting point when calculating the IBR because the term of the loan is more Lessee A should not automatically use the
closely related to the weighted average life of the lease. However, Lessee A would 15 year bullet loan rate as its IBR,
also need to adjust this rate to account for other factors such as:
• The rate not being an amortising rate - so may be higher than if an amortising
however it may be able to use this rate as
rate was used a starting point to calculate its IBR
• Financing factors – such as Lessee A’s credit risk, and
• Asset factors – whether the rate is for an asset with similar security. WH
Y?
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 POLLING QUESTION: IBR Rate
• Entity A enters into a lease for office premises with a 10 year lease
term

• Entity A determines that the appropriate IBR for this lease is 8%

• Entity A has an unsecured operating line of credit with an interest rate

of 6%

WH #11
Y? Is an IBR of 8% reasonable
It would be unusual for the rate in this scenario?
of borrowing on an unsecured operating
line of credit to be lower than the secured
borrowing for the leased right-of-use asset
(lease of office premises)
YES NO
The interest rate on the operating line of credit would
also have factored in Entity A’s credit risk. It would be
unusual if Entity A determined that that the significant
difference between the rate given for the operating
line of credit would be due to its credit risk

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 POLLING QUESTION: IBR Rate
BioMed Co. is a start-up entity in the biomedical
It is unlikely that the cost of capital would meet
industry. It has no borrowings and is financed entirely the definition of the lessee’s incremental
by equity. BioMed Co. enters into a lease. borrowing rate (refer to Appendix A of IFRS 16),
except in very specific circumstances

Can BioMed Co. use #12 BioMed Co. would not necessarily have any readily observable
its cost of capital as its IBR? borrowing rates on any debt, due to it having a very high risk of
default on any loans, making it unattractive for traditional
lending. However, it may have leases, such as office space,
which require an IBR to be estimated. In such cases, the IBR may
be close to BioMed’s equity cost of capital, since the nature of a
YES NO loan (including a lease) to an entity with extremely high credit
risk is, in practical terms, close to that of an equity investment

Note:
Cases such as these would generally be rare
and careful consideration would be required
WHY?
E P E NDS to determine that a rate similar to the equity
IT D cost of capital is appropriate.

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Case Study #2

© BDO
 CASE STUDY: Value added taxes (VAT) and IFRS 16 QUE
STIO
SCENARIO 1: – LEASE OF OFFICE PREMISES – IRRECOVERABLE VAT 1(a) N
• On 1 January 2019, ABC Is irrecoverable VAT a lease payment that should be included as
enters into a 5-year lease part of the lease liability measurement?
agreement to rent office
premises.
• Monthly rental payments, Views View 1 View 2 View 3
payable in arrears, are
CU 670, including VAT
• The VAT is 10% and is
charged on the whole rental VAT is viewed
payment The VAT portion The VAT portion as being part of
• Both principal and interest can be viewed the lease
Description as not being is an initial payment
portion under IFRS 16 of view direct cost of because it is
• The incremental borrowing part of the the asset. non-refundable
lease payment and is payable
rate for the lease is 8.05%
to the lessor.
per annum.
• The VAT paid by ABC cannot
be recovered, i.e. it is
irrecoverable

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 CASE STUDY: Value added taxes (VAT) and IFRS 16
ANSWER: SCENARIO 1 • The obligating event that gives rise to a liability to pay VAT:
• Invoicing by the lessor of each scheduled lease payment.
 View 1 - The VAT portion can be viewed as not being part of the lease
payment • Lease liability is calculated by:

• Possible alternative view 2 • Discounting the 60 monthly lease payment of CU 609 (CU 670/11 X 10) using the
incremental borrowing rate of 0.67% (8.05%/12)
 Lease payment’ is defined in Appendix A of IFRS 16 as:
Payments made by a lessee to a • Results in a lease liability of CU 30,000.
lessor relating to the right to use an underlying
• As each scheduled lease payment becomes due:
asset during the lease term,…
• Irrecoverable VAT would be expensed at the point at which it becomes payable
 The payment of the VAT could be viewed as not being a lease payment
• Not a payment relating to the right to use an underlying asset
Possible alternative view: – View 2
• A charge levied by a government relating to goods and services
with the lessor acting as a collection agent for the government
• The VAT is an initial direct cost of the right of use asset
• However, the obligation to pay the VAT only arises at
• Can be viewed as being within the scope of IFRIC 21 Levies
the related tax point (often the invoice date)
• IFRIC 21.4 defines a levy as:
• No amount relating to VAT would be capitalized
… an outflow of resources embodying economic benefits that is
• Lease rentals are billed monthly in arrears
Imposed by governments on entities in accordance with legislation • Obligation to pay VAT arises after the
(ie laws and/or regulations),…
commencement date of the lease
• If the lease payments are invoiced monthly in advance,
• VAT would not be included in the measurement of the lease liability or only the first month’s VAT would be capitalised
ROU • Lease liability in this alternative scenario would be
• Any non-refundable portion would be expensed when the underlying CU 30,061.
transaction occurs. This is because IFRIC 21.8 states that
The obligating event that gives rise to a liability to pay a levy is the
activity that triggers the payment of the levy, as identified by the
legislation….

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 CASE STUDY: Value added taxes (VAT) and IFRS 16 QUE
STIO
SCENARIO 1: LEASE OF OFFICE PREMISES – IRRECOVERABLE VAT 1(b) N

Assuming there are no other initial direct costs, payments

or any dismantling costs, what are the journal entries on
1 January 2019 and 31 January 2019 under View 1?
1 January 2019

Dr ROU asset CU 30,000

Cr Lease liability CU 30,000

Initial recognition of ROU asset and lease liability in accordance with IFRS 16, excluding VAT

31 January 2019
Dr Lease liability CU 408
Dr Interest expense CU 201
Dr VAT expense CU 61
Cr Cash CU 670

To account for first gross payment of CU 670

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 CASE STUDY: Value added taxes (VAT) and IFRS 16
SCENARIO 2: VAT RECOVERABLE

• Assume the same fact pattern as QUESTION Is the VAT payment to the lessor a ‘lease
scenario 1 2(a) payment’ as defined in IFRS 16?
• Except that the VAT paid by ABC
can be recovered
• i.e. it is refundable at the end of
each calendar quarter from the
YES NO
relevant tax authorities.

• The payment of the VAT to the lessor is not a ‘lease payment’ WHY
• Not a payment relating to the right to use an underlying asset
• It is a charge levied by a government relating to goods and
services with the lessor acting as a collection agent for the
government

75
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 QUE
CASE STUDY: Value added taxes (VAT) and IFRS 16 STIO
2(b) N
SCENARIO 2: VAT RECOVERABLE
What are the journal entries on:
• 1 January 2019 and
• 31 January 2019 when the first lease payment is made?
1 January 2019
Dr ROU asset CU 30,000
Cr Lease liability CU 30,000

Initial recognition of ROU asset and lease liability in accordance with IFRS 16,
excluding VAT

31 January 2019
Dr Lease liability CU 408
Dr Interest expense CU 201
Dr VAT expense CU 61
Cr Cash CU 670

To account for first gross payment of CU 670

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Case Study #3

© BDO
 Lease payments
ACCOUNTING FOR DIFFERENT TYPES OF LEASE PAYMENTS

E.g.:
• Payments linked to CPI
• Payments linked to a
benchmark interest
rate, or
• Payments that vary to
reflect changes in
market rental rates

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 Initial measurement of
CASE STUDY: Lease payments lease liability
Subsequent measurement

SCENARIO 1 Option 1 Present value of 10 • Recognise interest on the lease

payments of CU50,000 liability in profit or loss
• Deduct any amount paid from the
lease liability, and
• 10 year non-cancellable lease.
• Lease payment based on 1% of
• Lease payments are:
annual sales is recognised at the
• CU50,000 in arrears, plus
end of each year in profit or loss
• 1% of lessee’s annual sales
generated from the lease Option 2 Nil • Lease payment of CU 50,000 plus
property during the year 1% of annual sales is recognised in
profit or loss at the end of each
The initial measurement of year
the lease liability includes
the present value of 10
fixed lease payments of CU
50,000, (IFRS 16.27(a)). The lease payments of 1% of annual
sales is a variable lease payment that How ar
e th e
does not depend on an index or rate: lease p
ay
accoun ments
• It is excluded from the initial measurement of the ted for
lease liability
?
• It is recognised in profit or loss in the period in
which the event or conditions that trigger those
payment occurs (IFRS 16.38(b)), i.e. at the end of
each year. z
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 Initial measurement of
Subsequent measurement
lease liability

CASE STUDY: Lease paymentsOption 1 Present value of 10 • Recognise interest on the lease
payments of CU 100 liability in profit or loss
SCENARIO 2 • Deduct any amount paid from the
lease liability, and
• 10 year non-cancellable lease • If lessee ends up paying CU 50,000
• The minimum rent is CU 100 per annum in in any year, the difference of
arrears CU49,900 will be recognised in
• If sales > CU 1,000 per annum, the lease profit or loss
payments are CU 50,000
• The lessee has historically generated sales Option 2 Present value of 10 • Recognise interest on the lease
between CU 150,000 and CU 250,000 per payments of CU 50,000 liability in profit or loss
annum • Deduct any amount paid from the
lease liability, and
• CU 50,000 is an in-substance annual • If lessee end up paying CU100, the
fixed payment difference of CU49,900 will be
• Not realistically possible that the treated as a negative variable
lessee will have less than CU 1,000 in lease payment recognised in profit
sales per annum given its history or loss

• No true variability in the lease payments as only one

outcome is realistically possible to occur, meaning
that in substance the annual payments of CU50,000 How are the
ts
are unavoidable lease paymen
?
• Initial measurement of the lease liability includes accounted for
the PV of 10 in-substance fixed payment of CU
50,000.
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Case Study #4

© BDO
 CASE STUDY: Interaction between index-linked lease payments and rent
escalation
What is the payment profile that should be
A lessee enters into a 5-year lease with included in the measurement of the lease
a base rental cost of CU 200 per annum contract as at the commencement
payable in advance.
The rent will escalate at a fixed rate for WHAT date for years 4 and 5?
the first 3 years as follows:

ANSWER

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Case Study #5

© BDO
 QU
EST
I
(1) ON
CASE STUDY: Leases with refundable How does Strawberry Inc account
deposits for the deposit made to the lessor?
READ • Strawberry Inc. is a technology company that designs,
develops and sells consumer electronic products such as Options Accounting treatment
THIS! smart phones, computer tablets, laptops, smartwatches,
portable media players and wireless earbuds As a form of a lease payment. The
• Strawberry Inc. enters into a lease for a retail space in a deposit should be included in the
shopping centre with the lessor with the following terms: Option #1
measurement of the lease liability
• Lease term: 5 years
• Lease payments: CU2,000 per annum (paid in advance) and the right-of-use (ROU) asset
• Upon commencement of the lease, Strawberry Inc., must also
pay a refundable deposit of CU1,000.
Option #2 As an initial direct cost of the lease
• The deposit is refundable without interest at the end of
the lease term
• As long as the property is maintained in the condition as
required by the lease agreement. As a financial asset within the scope
Option #3
• If Strawberry Inc damages the property beyond normal ‘wear of IAS 32 and IFRS 9
and tear’, the lessor has the right to use some or all of the
deposit to repair the damage at the end of the lease term.
• However, for the purposes of the case study, assume that
the lessor is not expected to use part or all of the despot
to restore or repair the asset
• Repayment of the deposit is not dependent on the change in
the value of the building itself

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 • The entire amount of the deposit
• Is not a lease payment
CASE STUDY: Leases with refundable deposits • Is not an initial direct cost
• Because it is refundable to the lessee at the end of
ANSWER 1 the lease
• The lessee has a contractual right to receive cash
from the lessor at the end of the lease term as long as
Options Accounting treatment it complies with the applicable covenants of the lease
• Meets definition of a financial asset
As a form of a lease payment. The deposit should be
Option #1 included in the measurement of the lease liability and
the right-of-use (ROU) asset A financial asset is any asset that is: …
(c) a contractual right:
(i) to receive cash or another financial asset from
Option #2 As an initial direct cost of the lease
another entity; or (IAS 32.11)

Option #3 As a financial asset within the scope of IAS 32 and IFRS 9

• The deposit is a financial asset within the scope of IAS 32 and IFRS 9
• IFRS 9.5.1.1 generally requires financial assets to be measured on initial
recognition at their fair value
• Fair value of a financial asset that consists of a CU 1,000 cash in-flow in 5
years with no contractual interest = CU 784 (rounded)
• Assuming discount rate of 5%
• Note that this discount rate is not the lessee’s IBR
• Discount rate reflects a lending arrangement between the lessee and the
lessor
- The lessee is effectively lending the lessor CU1,000, interest free, for 5
85 years. © BDO
 CASE STUDY: Leases with refundable deposits
The lease deposit paid to the lessor arises in
ANSWER 1 (CONTINUED) the context of a lessee-lessor relationship
The difference would be an adjustment of
the consideration paid by the lessee to the
Difference between the transaction price and the fair lessor
value of the financial instrument (i.e. the deposit) is
accounted for based on the requirement of other
applicable IFRS standards
Economically, the lessee has provided an
interest-free loan to the lessor
• The benefit of which (CU 216) accrues to
The fair value of a financial instrument at initial
the lessor
recognition is normally the transaction price ….
• Forms part of the cost of the right-of-use
However, if part of the consideration given or received is asset (i.e. the benefit provided is an in-
for something other than the financial instrument, an substance lease payment).
entity shall measure the fair value of the financial
instrument. ... Any additional amount lent is an expense
or a reduction of income unless it qualifies for
recognition as some other type of asset.
(IFRS 9.B5.1.1)

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 CASE STUDY: Leases with refundable deposits
QUESTION 2
QUE
STIO
N
(2)
What is the journal entry at the time the deposit is
made, assuming a discount rate of 5%?

ANSWER

DR Financial asset 784 (fair value of financial asset)

DR Right-of-use asset 216 (difference between transaction price and fair value)
CR cash 1,000 (amount paid)

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 Remember
• All lessees who are party to a lease recognise a ‘right-of-use’ (ROU) asset
• There are two options for presentation of ROU assets:
(1) Either separately from other assets in the statement of financial position, or
(2) Included within the same line item that the corresponding asset would appear if it was owned by the
entity. If the lessee selects the second option, then they must disclose within the notes the value of the
ROU assets and in which line items they have been included
• The above requirement to present the ROU assets separately does not apply if the leased asset meets the definition of an
investment property. In this case the asset must be presented within investment properties.
• Similar to ROU assets, lease liabilities are also presented separately from other liabilities in the statement of financial
position or the lessee discloses these liabilities in the notes, as well as in which line item they have been included.
• Under IFRS 16, lessees recognise depreciation on ROU assets and a separate charge for interest on lease liabilities.
Operating lease rental expenses have been eliminated under IFRS 16.
• Lessees present interest expense on lease liabilities as a component of finance costs on the face of the statement of
profit and loss and other comprehensive income IFRS 16 includes two optional recognition exemptions related to low
value and short-term leases which are not recognised on the statement of financial position.

© BDO
References
• [IFRS Online] IFRS 16 Inventories Audit issues when determining the discount rate
• [IFRS Online] IFRS 16 Audit issues when establishing lease terms, payments and
measurement
• [IFRS Online] IFRS 16 Audit issues when identifying leases
• [IFRS Online] IFRS 16 Auditing financial statement disclosures
• [IFRS Online] IFRS 16 Auditing introduction
• [IFRS Online] IFRS 16 Impact and independence
• [IFRS Online] IFRS 16 Other consequential effects and considerations
• IFRS 16 Other issues_cases Study
• BKI Training Material_PSAK 73 (see 2021 recorded videos in google drive)
• IFRS 16 Leases Risk Identification Checklist [APT NG]
• IFRS 16 Leases Testing Workbook [APT NG]

© BDO
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